Rate cuts herald downturn?

From the Globe and Mail:

Canadian banks cut interest rates dramatically yesterday after the Bank of Canada slashed its main rate by half a percentage point and warned that a serious economic slowdown was only just beginning.

All major banks cut their prime lending rate by 50 basis points, amid a central bank warning that Canada faces a tough two years. A troubled U.S. economy has hit exports hard, and undermined business and consumer confidence, the bank said.

Marking the most serious cuts since the post-9/11 downturn, the bank has now cut rates twice in six weeks. Its key rate now stands at 3 per cent, 150 basis points lower than where it stood last fall. (A basis point is one one-hundredth of a percentage point.)

“The bank is now projecting a deeper and more protracted slowdown in the U.S. economy,” it said in a release. “This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008.”

Will these recent rate cuts boost our market further or prevent a downturn?  Certainly dropping rates is a way to discourage saving and encourage taking on more debt, but is the central bank in danger of kicking up inflation?  So far rate cuts and fiscal stimulus plans in the US have done little to stem dropping house prices and a sputtering economy.

43 Comments
newest
oldest most voted
Inline Feedbacks
View all comments
homerstreet
homerstreet
12 years ago

"What numbers do you look at when deciding whether to buy or sell a property?" If I wanted to buy now, I would closely look at: Inventory, Listed vs. Sold, BOC Prime, CPI, population growth and of course my personal financial situation. If I would invest for rental purposes I'd would further look for: low GRM, high CapRate, high DSCR, low Interest Rates, positive after tax cash-flow and high CCR. Yeah and let's not forget positive effects of the Olympics … just kidding! 🙂 I would probably not buy now, because prices are to high for a decent return on investment. But nevertheless that doesn't apply to people who entered the market a couple of years ago. Receiving over $1,000 dollars per month rent for a condo that you have bought 5 years ago for a mere $120,000 will make… Read more »

sheeplessinvancouver
sheeplessinvancouver
12 years ago

iwantin, you make some good points. The assumption – and I think it applies in most cases – is that most of us are conservative about investing in real estate.

If we happen to own a property – either outright or with a mortgage close to being paid off – and we can at least break even renting it, chances are we'll hold on to it whether prices go up or down. It may not be the best financial decision, but it's still the one we make.

I know a few people who've held on to condos they bought years ago and have since moved out of. They're quite happy to collect the small sum that comes to them in rent each month.

homerstreet
homerstreet
12 years ago

"Please explain what you see as the “fundamentals” of the market." I am talking about rental market not the real estate market in general. The rental market is great. Vacancy is low. A "blow-up" of the "bubble" will just flood the rental market with demand and raise rental prices. People always complain about the high Gross Rent Multiplier (GRM) in Vancouver, but they do not realize that in the last couple of years rent has actually increased quite a bit (for me average 5% annually in the last 3 years) and my net operating income increased even more. Perhaps appreciation outperformed the increase in rent by far, but for me as an investor it is the increase in rent that I am looking for. Appreciation is just a bonus. "if rental income covers mortgage with profit >>> definitely will not… Read more »

beatstreet
beatstreet
12 years ago

homerstreet I am glad that the stimulus being created by our new central bank governor is finding its way to the west coast.

waiting for pie
waiting for pie
12 years ago

Want in: check out the new post on supply under construction at mohicans site:
http://langley-financial-planning.blogspot.com/20

We've got a record number of condos under construction, we don't have as much immigration as we had ten years ago, and new residents are coming with less money than they used to. BC Hydro says there are 18,000 empty units just downtown. I work with people who have 'invested' in condos – this means they pay several hundred dollars a month over what they earn in rent from these units. Do you think they'll hold on to them if they lose their jobs?

Drachen
Drachen
12 years ago

"why would current owners sell their place if they can find renters to rent too?" Ok, let's assume that 75% or more of landlords in the city expect a return for their investment which is equal or better than they can do with a high security mutual fund. I think this is a safe assumption because with the hassles and extra work of being a landlord as opposed to parking your money most people would prefer the latter if returns are the same. So, to your examples: 1) Rent = Mortgage payment + This landlord has two problems. One There must be a significant amount of money tied up in the property for it to be positive cash flow. If one compares the return on that money you'll always find (in the current market) that if the property is not… Read more »

iwantin
iwantin
12 years ago

i am very happy reading all the bearish sentiment in this blog because i want to buy when the RE market tanks. however, i dont think it will tank too much because of all the renters that will be created. this high priced market is creating a lot of renters. and these renters need a place to stay. why would current owners sell their place if they can find renters to rent too? if rental income covers mortgage with profit >>> definitely will not have to sell if rent covers mortgage >>> will not have to sell if rental is below mortgage >>> not the end of the world, may sell or not sell. if rental income is way below mortgage >>> will have to sell. would be great if someone understands what im trying to say and explain in… Read more »

Drachen
Drachen
12 years ago

Perhaps I should explain the last bit about fundamentals better.

What numbers do you look at when deciding whether to buy or sell a property?

What mathematical formulae do you use to decide whether the numbers work for you or not?

Drachen
Drachen
12 years ago

"For me as an investor (not speculator)"

If you own Real Estate in Vancouver that you don't live in you are a speculator. An investor would only buy when the rent/price ratios were reasonable and would sell if those ratios went too far off base. If there's no profit margin you are speculating that prices will go up.

"I am sure I am not the only market participator who thinks like that and keeps his eye on the fundamentals"

If you currently own real estate in the lower mainland you either do not understand what the fundamentals are or you most certainly are not keeping a close eye on them.

Please explain what you see as the "fundamentals" of the market.

homerstreet
homerstreet
12 years ago

I must say, Krrish2 is not totally wrong – why is he being demolished. Is this really an bears-only-party going on here? I have a variable mortgage at TD. They have followed the BOC each and every time in the last three years with interest rate adjustments. They have just lowered there prime rate again (one day after BOC). And as I recall, all major Canadian banks have followed suite in the last couple of months. For me as an investor (not speculator), a 50 base point cut is a good reason NOT to sell. Fortunately, positive After-Tax-Cashflow doesn't push me into having to sell. Therefore the most important figure for me is not the fluctuating market value of my property but perhaps the Cash-on-cash return as well as the total return on my rental investment (including principle reduction, which… Read more »

beatstreet
beatstreet
12 years ago

For those who think that panic central bank rate cuts will save the US housing market, another point of view can be found from John Hussman who manages a number of investment funds in the US. He recently addressed the issue of what "inning" the Americans are in with respect to their housing crisis. There article is here: http://www.hussmanfunds.com/wmc/wmc080414.htm. He notes that a wave of US Mortgage resets is due about 6 months after our Olympic super event in 2010. Fortunately, Vancouver is different because as the Vancouver Sun notes, immigrants like to move here and we have a "limited supply of land".

krrish2
krrish2
12 years ago

Can’t read a chart? Yes Vancouver had 13,800 listings AT THE END OF

then why did he throw at me with some other reference? if you are trying to correct him write it down with request otherwise I won't accept your recomendation.

Don't waste my time again.

beatstreet
beatstreet
12 years ago

In terms of market trends, actual money changing hands is falling in greater vancouver.

Month Sales Ave Price Sales Value

Mar-08 2,997 $616,496 $1,847,638,512

Mar-07 3,582 $554,941 $1,987,798,662

Total sales value is down 7% year over year.

Meanwhile, as the US Fed has slashed interest rates, new home sales in the US have fallen from 611k per month in Nov 07 to 590k per month in Feb 08. Numbers for March out tomorrow.

Anonymous
Anonymous
12 years ago

Can't read a chart? Yes Vancouver had 13,800 listings AT THE END OF LAST MONTH. So far this month we've grown by about 1000 listings and this is supposed to be the busy spring selling season. Will we end April with 15,000 listings? It's possible!

Did you really fill out your own mortgage application or did someone do it for you?

krrish2
krrish2
12 years ago

Digi,

you inventory chart and reference site has a wrong data than you had claim listing on the link chart is 13,800 and on the total rebgv stat is 13,800 but their hand made total is 14,731 don't go to paul whatever again they like to post wrong numbers to make bear look like monkeys hu.

bdk
bdk
12 years ago

There is just no way anyone can be as stupid as Krissh pretends to be. he's just having fun, he's obviously lonely and knows better than to think more supply and negative sentiment will lead to the prices being higher here than in Cleveland. Since I'm breaking the rules here: What does Calcutta have to do with anything? Someone escaping horrific living conditions won't have $2 million in the bank, which according to your moronic logic is what your crappy unit at tv towers will be worth,and that means they can't move here! They would be happy anywhere in the first world regardless (that means they'd be happy to live in Red Deer Alberta). Paying down the principal on your mortgage faster does not equal more spending money now. To dumb it down for you. If you had a mortgage… Read more »

krrish2
krrish2
12 years ago

"Rate cuts in the US have so far not encouraged new buyers"

Existing Home Sales – April Report

Last Updated: 3/28/2008

Home Sales Report Summary

Sales of existing homes in the USA went up by 2.86% last month, from 4.89 million homes to 5.03 million homes.

Drachen
Drachen
12 years ago

"Current MLS around 14,000.same as usual."

If by "same as usual" you mean higher than it's been in at least 4 years then yes…

"Metro Vancouver population 2,289,900 (2007)"

Is this somehow relevant? You keep bringing it up. You DO know that Vancouver is not an especially large city right?

"1.rates cut always encourage new buyers to get into the market.

2.rates cut also encourage the present owners to hold their properties."

You're still pretty unclear on the whole bank rate thing aren't you? Also, as an added bonus, if you'd read and understood my above quote from the BMO site you'd realize that even if banks cut their rates it has no impact on the amount of money their clients pay each month. Rather the time line of the mortgage is adjusted.

Digi
Digi
12 years ago

Krrish, I know you're just trolling for replies but I can't leave this one uncorrected:

you said:

1.rates cut always encourage new buyers to get into the market.

No. Rate cuts in the US have so far not encouraged new buyers. As pointed out before Japan cut their rates to 0% (YES ZERO) to try to bring in new buyers. Whats next, paying people to take loans? I'll have a trillion dollars in that case.

you said:

Current MLS around 14,000.same as usual.

Wrong again. Since the very first month of 2005 REBGV listings have NEVER gone over 14,000. As of yesterday current listings stand at 14,731 which is a thousand more than we've had at any point on this graph.

Try posting something that isn't completely false.

-A-
-A-
12 years ago

Burden of Proof:

I sometime wonder just how heavily invested Bill Good is in Real Estate.

I am tempted to phone him and ask for disclosure, and if he is heavily invested should he not announce it every time he does a show, and call it an infomercial?

I wonder if the CRTC would be interested

krrish2
krrish2
12 years ago

"When a housing market turns, central bank rate cuts make NO DIFFERENCE"

Wrong,

1.rates cut always encourage new buyers to get into the market.

2.rates cut also encourage the present owners to hold their properties.

Result

*Threat to economy and real estate downturn since 2005 (VHB era).

*Metro Vancouver population 2,289,900 (2007)

*Current MLS around 14,000.same as usual.

*March Sales Results

Detached $764,616 +3,274 +.43%

Attached $473,543 +1,396 +.29%

Apartments $389,609 +2,577 + .67%

-A-
-A-
12 years ago

' ' ' ' The Fed, in the US can set rates because it is a “wholesaler” of a sort to the banks in the US, and therefore it can control short term rates. In Canada such is not the case, although BOC could become a lender of last resort to retail bankers in the event there is a run on a particular bank. When BOC sets the rates in Canada it is a signal to the banks as to the direction it wants the banks to move, if the banks do lower or increase their loan rates, they do so voluntarily. BOC has other methods of influencing interest rates, but that’s another story, and I doubt Krrissh , Krassh or whatever the fool calls himself today could possible be made to understand . But suffice to say, BOC won’t… Read more »

Burden of Proof
Burden of Proof
12 years ago

To summarize:

The more people that buy at the peak, the less there will be to buy at the bottom.

We should applaud Bill Good for getting as many people as possible to buy at the top. I hope he can keep it up in the face of plunging sales and rising inventory.

Sure, it will be a financial disaster for those who listened to Bill but it will be great for me and and other bears because we will profit more because of his efforts.

Burden of Proof
Burden of Proof
12 years ago

When a housing market turns, central bank rate cuts make NO DIFFERENCE. Look at any housing bust in history. Did Fed rate cuts in the US stop the bust? No. California foreclosures are up 300% YOY. It is an unmitigated disaster DESPITE Fed rate cuts. Did Japan cutting rates to zero stop their bust? No. Will the BOC cuts stop the Canadian bust? No. The market is a dead man walking. The more people that buy now at the peak, the more severe the bust will be. I always hope that more people will buy at the peak. When their capital and credit is destroyed in the bust, there remains VERY LITTLE MONEY out there chasing the available inventory. This means that my money and credit will buy more. Therefore, the more real estate people buy now at the peak… Read more »

Drachen
Drachen
12 years ago